The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) held its 50th meeting from August 6 to 8, 2024, addressing several critical issues affecting the Indian financial system. The meeting resulted in key decisions aimed at maintaining economic stability, addressing liquidity challenges, and adapting to shifts in investment trends.
Monetary Policy Highlights:
- Repo Rate Unchanged: The RBI maintained the repo rate under the Liquidity Adjustment Facility (LAF) at 6.50% for the ninth consecutive time. This decision reflects a cautious approach in light of current economic conditions.
- GDP Growth Projections: The RBI retained its GDP growth projection for FY25 at 7.2%, with quarterly estimates indicating steady growth:
- Q1 FY25: 7.1%
- Q2 FY25: 7.2%
- Q3 FY25: 7.3%
- Q4 FY25: 7.2%
- Q1 FY26: 7.2%
- Policy Rates:
- Policy Repo Rate: 6.50%
- Fixed Reverse Repo Rate: 3.35%
- Standing Deposit Facility (SDF) Rate: 6.25%
- Marginal Standing Facility (MSF) Rate: 6.75%
- Bank Rate: 6.75%
- Cash Reserve Ratio (CRR): 4.50%
- Statutory Liquidity Ratio (SLR): 18%
Additional Announcements:
- UPI Payment Limits: The RBI increased the UPI tax payment limit from ₹1 lakh to ₹5 lakh, enhancing the utility of digital payments.
- Shared UPI Accounts: A new provision now allows two users to share a single bank account for UPI payments, simplifying financial management for families and businesses.
- Measures Against Unauthorized Digital Lending Apps: In response to growing concerns, the RBI proposed new measures to curb unauthorized digital lending apps, aiming to protect consumers from predatory practices.
- Continuous Clearing of Cheques: The RBI proposed improvements to the Cheque Truncation System (CTS) by enabling continuous clearing, reducing the clearing cycle from T+1 days to a few hours.
- Record Forex Reserves: India’s forex reserves reached an all-time high of USD 675 billion as of August 2, 2024, reflecting robust management of the external sector.
- Credit Information Reporting: The frequency of reporting borrower credit information to Credit Information Companies (CICs) has been reduced from 30 days to 15 days, promoting more accurate credit assessments.
Economic and Market Insights:
- Attraction of Alternative Investments: Governor Shaktikanta Das noted that alternative investment avenues, such as equity markets, are becoming more attractive to retail customers, leading to challenges for banks as deposit growth trails behind loan growth. Banks are increasingly resorting to short-term non-retail deposits and other liability instruments to meet incremental credit demand.
- Liquidity Management Challenges: The widening gap between deposit growth and credit expansion raises potential liquidity management issues. Although banks have the option to raise deposit rates, this remains a commercial decision for each bank.
- Economic Resilience and Global Monitoring: Governor Das emphasized India’s enhanced resilience to external shocks but advised caution in interpreting global economic indicators, particularly from the US. The RBI will continue to monitor both domestic and international data to guide its actions.
- Sector-Specific Observations: The RBI observed that Foreign Alternative Investments (FAR) are primarily concentrated in the 5-10 year segment, representing 90% of total investments. Additionally, the monsoon, which has been 7% higher than the long-term average, is expected to positively impact Kharif crop production.
These announcements reflect the RBI’s commitment to fostering a stable financial environment while addressing emerging challenges in liquidity management, investment trends, and economic stability. The unchanged repo rate and steady GDP projections indicate a balanced approach amidst global uncertainties, while new measures and technological advancements underscore the RBI’s focus on modernizing financial systems and safeguarding consumer interests.
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